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Costly tax shelter penalties imposed after October 1

Taxpayers who failed to file, or filed incomplete disclosure statements (IRS 8886) regarding their reportable or listed transactions face the possibility of stiff penalties after October 1.

Federal tax law and regulations require taxpayers that have participated in these highly sophisticated "reportable" and "listed" transactions to disclose certain information on the taxpayer's return. California law follows federal treatment. A "reportable" transaction is any transaction the IRS or FTB determines has the potential for tax avoidance or evasion. There are six major categories of "reportable" transactions that, for example, involve certain types of tax losses that exceed certain thresholds and transactions with contractual protection where fees paid by the taxpayer to the promoter are contingent on the taxpayer's realization of tax benefits from the transaction.

A "listed" transaction is one that the IRS or FTB has determined to be structured for the significant purpose of tax avoidance or evasion. Examples of "listed" transactions are the "Son of Boss," (IRS Notice 2000-44), which describes transactions generating losses resulting from artificially inflating the basis of partnership interest and inappropriate deductions for payments made through a partnership. Penalties for each failure to provide a disclosure statement are $15,000 for reportable transactions and $30,000 for listed transactions.

FTB estimates that abusive tax shelters cost California $500 million in lost tax dollars each year. FTB will continue to aggressively pursue those taxpayers who use, and the promoters who recommend these tax shelters.

Participants in FTB's 2004 Voluntary Compliance Initiative and in the 2006 California Tax Shelter Resolution Initiative (FTB Notice 2006-1) are not subject to these penalties for transactions that were disclosed through those initiatives. To learn more, visit FTB's Website.